The Ten Commandments of Effective Money Management In Your 20s

Introduction

The original 10 Commandments apply to help us straighten out our lives. Similarly, financial commandments serve as guidelines to help you lay down a financial future starting from your 20s. If you're looking to receive insights into creating a better financial life for you and your future, let's look at the ten financial Commandments you need to follow beginning from your 20s.

1. Thou shalt get a job

Your 20s are an exciting time to establish yourself as an individual. It also means taking advantage of your youth to do meaningful things and secure an income. 

Money defines the quality of your life, and hence, you can only spend money if you have a good income. So whether you're looking to get a job or start a business, now's the time to begin.

2. Thou shalt set down a budget

With a job in hand, you now need to take stock of your money situation — how much you own and how much you need to spend. At your age, starting with a basic budget can be a universal step in getting ahead.

When you lay down a budget, you make a conscious effort in knowing how much you're spending, borrowing, saving and investing. A budget also puts you in control and knows where and how much of your money is going. 

Choose from either the 80/20 budget or the 50/30/20 budget methods. 

• 80/20: This budget approach divides your income into two distinct categories — 80% into savings and the remainder for expenses. 

• 50/30/20: Using this approach divides your income into three categories — obligate three expenses, discretionary spends and savings, respectively.

How to effectively manage your money in your 20s Part-2 ICICI Direct

3. Thou shalt start to save

With a new job in hand and a budget in place, it's time to start stashing for your future. Your 20s is a great time to start saving for several financial goals. The sooner you start saving, the better you can meet your goals. 

Begin by keeping at least 10% of your salary to stay on stable ground. As you get comfortable setting aside money for a rainy day, you can increase the savings component every month with the rise in your income from 10, 15, to 20%. 

Ideally, setting up an automatic savings mechanism that auto-deducts straight from your bank account every month without your manual intervention will ensure the money gets saved before you're tempted to splurge. When setting aside a savings goal to achieve your objective, remember it takes patience and hence, you need to trust the process and time.

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4. Thou shalt set goals

No matter the budget you choose, you need to set a goal to save a specific amount every month and keep contributing to it until you reach it. 

Remember to make an emergency fund your first primary goal. Ensure you have at least 9 to 12 months of living expenses set aside in an emergency fund to make sure you are covered in the event of a job loss or any other financial emergency. 

Similarly, other financial goals set you on a journey towards the financial future you need. Earmark your goals into short-term, midterm and long-term and begin a Systematic Investment Plan [SIP] into mutual funds to allow you to meet every goal distinctly within your specified time frame.

5. Thou shalt understand taxation

A new job means having to taxes. Starting to learn about taxes in your 20s can allow you to look for ways to save on taxes and get organized with your tax documents at the time of filing them. 

Learning about taxation, the income tax bracket you fall in, deductions, incentives and more can help you understand where and how to invest. When you set down a disciplined regime of consistently filing the returns and paying taxes on time, it allows you to build a strong financial record and understand how to maximize your overall financial life. 

Starting from your 20s, your tax situation may begin to get more complex as you enter new income tax brackets. So, learning how the tax code flows can help you control aspects of it and succeed financially.

6. Thou shall insure yourself

Protecting your life and finances through insurance is a wise move at this age. That's because you make a conscious effort to ensure your assets are protected in case of disaster and give yourself the peace of mind of being covered for any future financial emergencies. 

Buying health and life insurance at an early age can get you several benefits, such as low premiums, higher sum assured, perks, benefits and more. With every life change, such as marriage or a new family member, evaluate your insurance needs and make adjustments as and when required.

Additional read:How rebalancing your portfolio helps you stay on track with your goals

7. Thou shalt repay all debts on time

Debt is a massive problem in today's world that can cripple one's overall finances. If not handled carefully, any debt you take on in your 20s can follow you into your 30s, 40s and beyond if not repaid on time. 

Additionally, it also reduces your overall net worth and negatively affects your credit score. An excellent credit score that shows you repay your debt obligations on time allows you to negotiate better terms and conditions and lower interests. But if you're struggling to repay debt, it could disrupt your financial success. The sooner you repay, the more peace of mind you can gain and set yourself towards financial freedom. 

List down all your debts and differentiate between high-interest and low-interest debt. Choose from the snowball method or debt avalanche method that are easy repayment strategies to help you pay off and control your debt.

• Snowball method: Look to paying off your debt in the smallest amount to the largest one. As you gain momentum and conquer one debt at a time, roll the money forward to the next smallest balance until you repay all your debts.

• Debt avalanche method: Pay off your debt in the order of the highest interest rate to the lowest. When you prioritize paying off the highest interest rate, you can save additional money on interest payments.

8. Thou shalt invest towards building wealth

The key to creating wealth is to start investing now. Why? To take the benefits of the magic of compounding. Compounding or compound interest is the interest owned on interest. It basically means that your money invested in an asset such as equities or equity mutual funds allows you to earn more money over time. 

Signs that reveal you're ready to invest:

• Laid down a long-term financial plan and strategy

• Established a healthy emergency fund

• Earning a good income

• Prepared to invest

If you've checked all the above boxes, look into your unique financial situation, risk appetite and time horizon to start investing. For comprehensive investment advice, it can be wise to consult a financial advisor or professional to explain how to get your finances in order and build wealth.

9. Thou shall continue to educate yourself

Whether it comes to knowing more about personal finance or building your skill levels, take the time to increase your net worth by gaining knowledge and certifications in your work area. 

Also, when it comes to financial knowledge, dedicate some time during the day or week to read up on personal finance subjects. After all, your money is your responsibility, and the decisions you take can determine how your money can work for you.

Additional read:What you need to know about SIPs in mutual funds

10. Thou shalt donate to charity

No matter how small your income, there are always people in far more challenging conditions in the world. Nurturing a sense of donating and giving to causes dear to you will allow you to be grateful for the things in your life and contribute to people who really need help. 

Look into the causes you believe to volunteer your time and donate money that less fortunate souls will appreciate.

Conclusion

A healthy and prosperous financial future requires you to manage your money effectively from the date you earn your first paycheck. That's why anytime you face a money decision that falls within the above 10 Commandments, you can apply these in your life to ensure a healthy personal financial life. 

Disclaimer

ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470.  The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  Investments in securities market are subject to market risks, read all the related documents carefully before investing. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents are solely for informational and educational purpose.